Microsoft revenue falls, income down 32 percent (update2)

Microsoft Corp. said Thursday that quarterly revenue fell 5.6 percent over last year because of falling PC and server sales in the global markets.

The Redmond-based software company also reported that net income fell 32 percent.

The quarterly revenue fall, year-over-year, marked a first for Microsoft’s history as a public company. (Microsoft first went public in 1986.)

Sales were expected to be down because PC shipments are down, and the Windows operating system and business software account for Microsoft’s largest source of revenue.

Microsoft Chief Financial Officer Chris Liddell said Thursday that the recession is the most difficult economic environment the company has faced in its 30-year history.

He added that Microsoft is in a unique position to evaluate the world economy — and it doesn’t look good.

“While we all would like to believe that recovery would be soon and painless, we unfortunately believe it will be slow and gradual,” Liddell said on an earnings conference call. “On the macroeconomic front, we saw a broad-based slow down across virtually all product lines and geographies.”

Revenue from Windows operating systems decreased because of PC sales, and because of a shift to lower priced netbook laptops, Microsoft said in its quarterly income filing with the Securities and Exchange Commission.

Analysts had been watching to see if the sale of netbooks — inexpensive, small laptops — would hurt Microsoft sales. Microsoft sold a discounted version of Windows XP to netbook manufacturers.

Microsoft reported revenue of $13.65 billion for the quarter. Microsoft’s third-quarter revenue in 2008 was $14.454 billion. For the quarter that ended in March 2007, it was $14.398 billion. In 2006, it was $10.9 billion. In 2005, it was $9.620 billion.

Net income for the third quarter, which ended March 31, fell to $2.98 billion, or 33 cents per share, from $4.39 billion, or 47 cents, in the same period last year.

The company missed Wall Street revenue expectations.

Wall Street analysts, on average, expected Microsoft to report revenue of $14.09 billion. They also expected net income of 39 cents per share.

The positive news

Many of Microsoft’s business clients, which hold multi-year contracts, are still renewing those contracts, but it’s increasingly difficult for Microsoft to up sell on them, Liddell said.

In a good economy, companies upgrade systems and services and purchase more licenses as more employees are added. That is not happening now, Liddell said, calling the business “overall a wash.”

Also, demand has increased for lower-cost products.

Microsoft’s customer loyalty among business clients is encouraging, said Taunya Sell, vice president of equity research at Seattle-based Ragen MacKenzie.

“Given the challenging PC markets, the parts of their business that suffered the most in the quarter were not a surprise,” she said. “Tech spending in general is very tough. …The fact that their enterprise business is holding up suggests that people are finding value in the software they provide.”

In a tough market, there’s not much else the company can do beyond keeping customers and cutting expenses where possible, she said.

“They’re doing the right things,” she said. “I look at it as a pretty decent quarter in a tough environment.”

Job cuts

Microsoft paid $290 million in severance charges related to its previously announced plans to cut 5,000 jobs. It also suffered a $420 million impairment to its investments. Those two figures combined to shave 6 cents per share off Microsoft’s earnings.

The company reduced its headcount by about 1,100 employees during the quarter. Because it is hiring at the same time, the company ended the quarter with 800 fewer employees than with which it started.

Although Microsoft’s profit fell 32 percent, nearly $3 billion is still a lot of money to earn in a three-month span. (It’s larger than the annual gross domestic product of at least 31 countries.)

So why does the company still intend to pursue about 5,000 job cuts across divisions, and cut contractor pay?

According to Microsoft, it’s all about strategy, or strategic focus.

“In order to maintain profitability, particularly during these challenging economic times, the company has to ensure that its operating as efficiently as possible,” a company spokeswoman said Thursday via e-mail. “Microsoft took a close look at all costs across the company and made decisions based on each group’s opportunities and the ability to drive increased efficiency. The company is making the necessary changes to ensure that the right resources are focused on the right priorities.”

The company reported its earnings after market close. Microsoft’s stock gained 14 cents on Thursday to close at $18.92. The stock gained more than 4 percent in after-hours trading.

The stock price has fluctuated between $14.87 and $32.10 in the past year. Microsoft’s stock price has fallen 41 percent in the past 12 months.

And finally, I found the numbers regarding Microsoft’s Entertainment and Devices Division particiularly interesting, because the division reported a $31 million operating loss, even though revenue was only down slightly.

Here’s what Microsoft had to say about the division’s performance:

EDD revenue decreased primarily due to decreased sales of application software for Apple’s Macintosh computers, partially offset by increased Xbox 360 platform and PC game revenue. The decrease in revenue included an unfavorable impact from foreign currency exchange rates of $38 million or two percentage points. Sales of application software for Apple’s Macintosh computers declined 63%, reflecting the launch of Mac Office 2008 in the prior year as well as a decline in sales of Apple computers. Xbox 360 platform and PC game revenue increased 16%, primarily as a result of an increase in Xbox 360 platform sales, partially offset by decreased revenue per Xbox 360 console due to price reductions during the past 12 months. We shipped 1.7 million Xbox 360 consoles during the third quarter of fiscal year 2009, compared with 1.3 million Xbox 360 consoles during the third quarter of fiscal year 2008.

EDD operating income decreased primarily due to increased research and development expenses and cost of revenue. Research and development expenses increased $66 million or 18%, primarily reflecting increased headcount-related expenses associated with the Windows Mobile device platform. Cost of revenue increased $52 million or 6%, primarily driven by increased costs associated with the Xbox 360 platform, reflecting the increase in console and video game sales.